Renewable Energy In Spain: The Good, And The Downright Ugly

The Good: Last week, Red Eléctrica de España announced that renewable energy contributed 54% of Spain’s electricity mix in April. Of that total, hydropower and wind provided the majority, while photovoltaics and solar thermal contributed approximately 5%.

In the previous month, renewables covered almost 52% of the country’s electricity requirements. That is a considerable accomplishment: more than half the electrons generated in the past two months were created without associated fuel costs or emissions. In addition, Spain met the very difficult technical challenge of successfully integrating these intermittent resources into the grid.

An unmitigated success story? Not quite.

The Ugly: We can skip the Bad. Things in Spain are at a state where they aren't just bad, they are downright ugly. Spain’s subsidized renewable party is coming to an end. Spain now has an enormous ‘electricity deficit” - the difference between the sum paid by utilities to power generators and the amount utilities have recouped from their customers. This has occurred as a consequence of Spain’s aggressive subsidized approach to promoting renewables, including high feed-in tariffs to power generators. However, the main contributor to the deficit problem was a poorly designed policy that kept consumer rates low even as supply costs climbed, so the true costs were never passed on to the user. According to
Bloomberg, this annual discrepancy between utility payments to renewable power producers and the revenue they collected from customers was 5.6 billion Euros ($7.3 billion) for 2012, despite the introduction of new taxes.

The trend is worsening, as the 2012 gap represented a 46% increase over the previous year’s shortfall. All told, the entire deficit - which has been growing since 2005, but really took off in 2008 with the financial crisis – exceeds 25.5 billion Euros.

The current government has proposed new measures to address this situation, including a 7% tax on generation, and a drastic cut in subsidies for new clean energy projects. To deal with the financial ramifications of this issue, the utilities are working to bundle this increased debt into securities that will be sold to investors (to be paid by consumers on future electricity bills - or so the securities investors hope).

Meanwhile, in March, Fitch downgraded five existing Spanish electricity tariff deficit securitizations, citing “the structural imbalance and the negative trend observed on the overall electricity system cash flows as well as the uncertainty of the regulatory environment affecting the electricity sector.” The ratings agency continued “Despite the government's efforts during 2012 to tackle the on-going tariff deficit problem, Fitch believes that the Spanish electricity system will likely continue generating tariff deficits beyond 2013...total tariff deficit annuities now represent approximately 21% of regulated system revenues, compared with 12% a year ago.”

Fitch further notes that the system continues to generate deficits which are being financed by the Spanish utilities, notably Endesa,
Iberdrola, and
Gas Natural SDC.

Clearly, the Spanish electricity sector is in a mess. In retrospect, the cause of this problem is pretty easy to see. Costs got out of hand relative to revenues (in that sense, the situation is at least somewhat similar to California’s power crisis in 2000/2001, when price caps to the utilities limited their ability to recoup costs - of course, Enron’s market manipulations further exacerbated that situation).

The public policy objective was laudable. Who doesn’t want renewable energy? Unfortunately, the implementation was lamentable and the resulting situation is quite serious. It is therefore important for the rest of us to learn from Spain as our energy technologies and policies evolve over the coming years. Some of the simple lessons: pay as you go; be reasonable about the subsidies offered to suppliers; and take action quickly if mid-course corrections are necessary.

The pain in Spain does not negate the value of renewables, but it does point out the need to be thoughtful and deliberate about both the goals and the methodologies of a proactive energy policy. In the end, somebody always has to pay the bill.